New Delhi: Looking to spur investment in energy-efficient technologies, the Indian government is considering a proposal to extend tax exemptions to venture capital funds investing in such projects.
Other measures being considered include an income-tax exemption for energy service companies (Escos), which provide solutions for improved energy efficiency in buildings, utilities and offices and whose profits are directly tied to the savings achieved; a reduction in VAT, or value-added tax, for compact fluorescent lamps (CFLs) as well as tax incentives for more energy-efficient appliances.
The proposal has gained urgency following the sharp drop in international oil prices to less than $50 (Rs2,365) per barrel, which typically acts as a disincentive to invest in alternative energy.
Also See Action Plan (Graphic)
As part of India’s strategy to reduce greenhouse gas emissions—it is the eighth largest producer of such pollutants—these new breaks are being proposed by the ministry of power under the National Mission for Enhanced Energy Efficiency and are part of a national action plan announced by Prime Minister Manmohan Singh’s council on climate change on 30 June.
“With (a) recession, the first thing companies look at is to cut costs and, fortunately, that is exactly what energy efficiency does,” said Saurabh Kumar, secretary for Bureau of Energy Efficiency (BEE), a statutory body under the ministry that is handling the proposals.
Venture capital and private equity investment in so-called clean technology in India more than doubled between 2006 and 2007, estimates Cleantech Group Llc., a US-based clean-technology company which estimates that in 2007, investors committed $290 million in 11 clean-tech investment deals, compared with $140 million in nine deals in 2006.
Most VCs invested in recycling and waste management energy generation and improving energy efficiencies.
While the India investments are similar to the ones made in China in the same period, they are sharply below the $1.33 billion in Europe and $3.65 billion invested in the US in the same year.
“Any exemption always helps. But more than I-T (exemption,) the government could play a role...in providing funds to entrepreneurs. Currently VCs call the shots and give innovators a lower evaluation. It would be great if the government involved itself in providing seed money,” said Shashikanth Suryanarayanan, a professor at Indian Institute of Technology, Bombay, and a founder and director of Sedemac, which provides energy efficiency solutions for the automotive and renewable energy markets. “What is more important is that we send the right signals to the market. Currently, people don’t see a market or value in energy efficiency, which needs to be changed.”
According to the head of a venture capital fund floated by an Indian entity, tax concessions are unlikely to attract investments in energy service companies.
“About 90% of the pool of venture capital funds in India originates in North America and is routed through Mauritius. Tax is therefore not an issue because of India’s tax treaty (with Mauritius). Funds are mostly returns-oriented,” the person said.
Escos, which are also facing financial hurdles, are being given tax exemptions under the move along with a proposed fund known as a partial risk guarantee fund, which will help address credit risk for Escos, as reported by Mint on 18 June.
“We are in discussions with three banks on the fund,” added Kumar of BEE.
CFLs, which are more energy-efficient than typical bulbs and have received a big push from the government under the countrywide Bachat Lamp Yojana, are in line to receive a VAT cut. The Haryana and Andhra Pradesh governments have already reduced VAT on CFLs.
A power ministry report, based on which the recommendations were made, says: “There is a need to reduce CFL price by Rs8-10 to make it more attractive for consumers.” The combined loss in revenue is projected at Rs80 crore, which is small compared with the associated reduced demand in electricity, the report adds.
With an estimated 400 million light points still on incandescent bulbs, the potential saving if they are all switched to CFLs is estimated to be the equivalent of 10,000MW in power capacity.
Appliances such as air conditioners, televisions and refrigerators are also slated to receive tax incentives for higher energy efficiency. BEE has proposed removal of VAT from those that are rated by it as five-star, 4% VAT for three-four-star labelled products and 8% VAT for one-two star products, helping bring down retail costs of such energy-efficient appliances.
The ministry report goes on to say: “The likely loss in revenue will be more than offset by the energy consumption reduction as well as the volumes of energy-efficient products that will become available in the market.”